But that would be a bit over-the-top. The soaring Chinese trade surplus though does imply that the scale of capital outflows needed to keep the RMB from rising, should Chine ever liberalize its capital account (which, as Drezner notes, isn’t about to happen), has grown. As for that matter, does all the money flowing into China’s property market …

I see why SAFE officials hinted over the weekend that China’s reserves currently top $1 trillion. A nearly $20b August trade surplus and valuation gains on China’s euros and pounds in August could easily push China’s August reserve growth above $30b – and that puts China within easy shouting distance of a trillion.

China’s y/y export growth accelerated in August, with exports up nearly 33% y/y. To be fair to Dr. Cowen I should note that several years ago I argued that there was no way that China could sustain that kind of export growth as its export base expanded, no matter how tenaciously China clung to its peg. I was wrong.

Sclerotic Europe, not the US, has driven China’s export growth. That has been true since 2003. But it has been particularly true in 2006. At least for the first six months of the year. I don’t (yet) know about August – I like to work off the US and European data rather than the Chinese data since the US and Europe adjust for Chinese exports through Hong-Kong. But China sure is selling a lot of stuff to someone.

The recent surge in Chinese exports to Europe – the Wall Street Journal has a nice graph -- has been a massively underreported story.

We all know that US imports from China have grown very, very fast over the past few years. But the surprising fact is that the increase in US imports from China has lagged overall Chinese export growth (both reported in dollar terms). I’ll try to put up a graph on this soon.

I know it is fashionable in the Anglophone press to argue that exchange rate moves don’t really matter. The dollar’s fall (v. euro) didn’t lead to an immediate fall in the US trade deficit. And I think the consensus in the Anglophone press (the Economist, Lex, breaking views) is that changes in the RMB won’t have much of an impact on global trade balance.

I really find that conclusion surprising. The acceleration in Chinese exports came after the RMB started to fall in real effective terms. And it has been driven by absolutely phenomenal growth in Chinese exports to Europe.

The US trade deficit is responding to the weaker dollar, just with a bit longer lag than in the past (see Menzie Chinn). One potential reason for the longer lag? The entire dollar zone depreciated against the world starting in 2002. China’s policy of resisting pressure to appreciate against the dollar as the dollar fell against the euro, in my view, meant that more of the “gains” from a weaker dollar went to China’s export sector, and fewer went to the US export sector. Europe now imports more from China than the US.

The story that emerges from the US and European data is that dollar depreciation led to a modest (but important) increase in US exports to Europe (graphs here), as well as helping the US compete with Europe in third party markets. But the surge in US exports to Europe pales relative to the huge surge in Chinese exports to Europe. That surge in Chinese exports to Europe, in turn, is one big reason why China’s overall current account surplus is now so big (particularly in light of China’s huge bill for imported commodities).

And since China keeps most of its reserves in dollars – from what we know – the rise in Europe’s deficit with China and associated rise in China’s global surplus has been one way the US current account deficit has been financed.

I agree with Morris Goldstein: we don’t quite know all the ways exchange rate moves influence savings and investment rates. But we do know that the global balance of payments has to add up. And that the US cannot run a massive current account deficit unless others run massive surpluses. And that it sure seems like the fall in the RMB (Against the world) has been correlated with a surge in China’s surplus.

That is why I think RMB appreciation is a crucial part of global rebalancing. Otherwise, dollar depreciation may lead to a surge in China’s surplus. Not a fall in the US deficit.